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Exploiting Spillovers to forecast Crashes

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  • Francine Gresnigt

    (Erasmus University Rotterdam)

  • Erik Kole

    (Erasmus University Rotterdam)

  • Philip Hans Franses

    (Erasmus University Rotterdam, the Netherlands)

Abstract

We develop Hawkes models in which events are triggered through self as well as cross-excitation. We examine whether incorporating cross-excitation improves the forecasts of extremes in asset returns compared to only self-excitation. The models are applied to US stocks, bonds and dollar exchange rates. In-sample, a Lagrange Multiplier test indicates the existence of cross-excitation for these series. Out-of-sample, we find that the models that include spillover effects forecast crashes and the Value-at-Risk significantly more accurately than the models without.

Suggested Citation

  • Francine Gresnigt & Erik Kole & Philip Hans Franses, 2015. "Exploiting Spillovers to forecast Crashes," Tinbergen Institute Discussion Papers 15-118/III, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20150118
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    More about this item

    Keywords

    Hawkes processes; extremal dependence; Value-at-Risk; financial crashes; spillover;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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